A great part of the wealth of our country is in the cities. When a mayor says that his city is on the verge of bankruptcy, he means that when the time comes to run for reelection he wants to be able to claim credit for straightening out a mess that was left to him by his predecessor. What he means when he says that his city must have state or federal aid to finance some improvements is (1) the taxpayers of the city (or some important group of them) would rather go without the improvements than pay for it themselves); or (2) although they would pay for it themselves if they had to, they would much prefer to have some other taxpayers pay for it. Rarely if ever does a mayor who makes such a statement mean (1) that for the city to pay for the improvement would necessarily force some taxpayers into poverty; or (2) that the city could not raise the money even if it were willing to force some of its taxpayers into poverty. In short, the “revenue crisis” mainly reflects the fact that people hate to pay taxes and that they think that by crying poverty they can shift some of the bill to someone else.

[…]

That we have not yet been willing to pay the price of solving, or alleviating such “problems” even when the price is a very small one suggests that they are not really critical. Indeed, one might say that, by definition, a critical problem is one that people are willing to pay a considerable price to have solved.

Whenever I hear about governments’ fiscal woes, my go-to remedy is austerity. But I still furrow my brow when e.g. Californians tell me that higher taxes can’t balance their budgets. Most obviously, if unimproved land still has market value, governments clearly have yet to exhaust their tax base.

READER COMMENTS

Matthias Goergens

Jan 7 2019 at 3:01pm

Depends a bit on which taxes they are allowed to raise, of course. Institutional constraints are real. (And yes, all kinds of taxes drive down the value of land. Though some taxes are so inefficient that the deadweight loss far outweighs any benefit of the public good the taxes can buy, even if a more efficient form of taxation might make it worthwhile after all.)

But taken directly, the value of land is the ideal thing to tax.

Denver

Jan 7 2019 at 4:48pm

The problem there, of course, is that giving the state precedent to tax more, inevitably leads to higher taxes in socially detrimental ways.

Sure, if voters we’re rational, maybe we ought to seriously consider an LVT to balance the budget. But, as Bryan should well know (given he wrote a book on the subject), voters are not rational. So I doubt higher taxes would ever come in any form other than nice sounding proposals like higher marginal rates on wealthy incomes.

“We need to tax the value of unimproved land” falls on deaf ears. “The rich need to pay their fair share” does not.

MarkW

Jan 9 2019 at 7:33am

Most obviously, if unimproved land still has market value, governments clearly have yet to exhaust their tax base.

Detroit managed to do that (in much of the city, at least). There are tens of thousands of empty parcels with essentially no market value. There are (formerly dense) single-family neighborhoods close to downtown that now look like rural areas. Where there is active development in Detroit, it is driven by 15-year, ‘enterprise zone’ tax abatements, without which the developments would not be economically viable.

But even before unimproved land is completely worthless, a government can reach the point where it’s almost impossible to raise more property tax revenue because further rate increases depress property values enough to offset the higher rates.

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Glaeser on Cities

Edward Glaeser of Harvard University and author of The Triumph of Cities talks with EconTalk host Russ Roberts about American cities. The conversation begins with a discussion of the history of Detroit over the last century and its current plight. What might be done to improve Detroit's situation? Why are other cities experiencing similar challenges to those facing Detroit? Why are some cities thriving and growing? What policies might help ailing cities and what policies have helped those cities...